Gas price surges to a record high in Europe on supply concerns

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LONDON — Natural gas contracts hit new highs in Europe on Tuesday, as soaring prices continue to put pressure on the region’s energy sector ahead of the winter period.

November contracts at the Dutch TTF hub — a European benchmark for natural gas — were trading at around 118 euros per megawatt hour (MWH) just after midday in London. The front-month contract was up almost 19% on the day, setting a new record high, and has risen almost 400% since the start of the year.

In the U.K. — which has been hit particularly hard by the surging cost of wholesale natural gas — prices for November rose 14% to £2.79 per therm on Tuesday. Meanwhile, British wholesale gas for immediate delivery rose by 23% to £2.50 per therm.

Soaring wholesale prices have partially been caused by a surge in demand, particularly from Asia, as economies emerge from Covid-19 induced lockdowns. A cold European winter and spring also meant supplies had already been heavily depleted by the summer.

Meanwhile, falling domestic production, adverse U.S. weather conditions and essential maintenance works have created a tight gas market and made restocking gas supplies ahead of the coming winter difficult across the region.

Stress tests for the energy sector?

Several British energy suppliers have collapsed amid the gas price crisis. September alone saw nine companies cease trading, according to reports.

In a normal year, between five and eight companies exit the U.K. market, according to U.K. Business Minister Kwasi Kwarteng.

Speaking to CNBC’s “Street Signs Europe” on Tuesday, Greg Jackson, CEO of Octopus Energy — which recently absorbed more than half a million customers from collapsed competitor Avro — said many companies had failed to weather the crisis because they were “buying short and selling long.”

“Octopus was able to hedge its supplies,” he said. “Today we’ve got over 3 million [customers], so you really can hedge up to scale. I think those [failed] companies were hoping that if prices fell, they could scoop up customers with a bargain, if they rose then they’d be able to batten down the hatches and see through the crisis. This crisis is so great no one could weather it if they weren’t hedged.”

Jackson suggested that the stress tests carried out in the banking sector ought to be applied in the energy sector to ensure companies were operating responsibly.

“What we’ve seen here is a need to prevent the [same] sort of turmoil,” he told CNBC. “We don’t need masses of regulation, just some lightweight stress tests. We don’t want to stall competition when competition is between companies behaving responsibly.”

Jackson added: “What we now need to do is make sure that competition is on the basis of companies being well run, having low costs because they’re being efficient and using technology, rather than because they’re gambling in the market.”

Britain vulnerable

Rising gas prices aren’t a problem unique to Britain. In recent weeks, governments in Spain, Italy, Greece, and France have taken drastic actions to minimize its impact on consumers.

French lawmakers are pushing for the EU to become less dependent on natural gas from external markets. Most of the bloc’s supplies come from Russia and Norway.

However, Britain is particularly vulnerable to the current price crisis because gas is crucial to the U.K.’s energy supply. It plays a significant role in heating, industry and power generation, and more than 22 million households are connected to the country’s gas grid.

The largest single source of gas in the country is the U.K. Continental Shelf, which made up around 48% of total supply last year. However, the UCS is a mature source, meaning it must be supplemented with gas imported from international markets.

In September, the U.K.’s Kwarteng told Sky News that the government was considering “a lot of options” to protect suppliers from elevated wholesale prices, including potential state-backed loans. However, he suggested that not every energy supplier would be eligible to benefit from such a scheme.

The U.K. has limits on how much suppliers are able to charge consumers for energy, with price caps reviewed by the government every six months. Some are expecting the current cap to be lifted when it is reviewed by ministers in April, meaning British households will absorb some of the increased wholesale cost.

Analysts have warned that the rise in gas prices is likely to translate to high levels of inflation. In a report on its September monetary policy decision, the Bank of England said the inflation rate was likely to climb to “slightly above” 4% this year, double its target level.

— CNBC’s Silvia Amaro contributed to this report.

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